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Branded Apparel & Footwear
INITIATION
Mini Launch: Adding Five Intriguing Stocks to
our Coverage
We are expanding our apparel and footwear coverage universe to include
Guess, Warnaco, Iconix, Gildan, and Deckers. We initiated coverage of Guess
with an Outperform rating; Warnaco, Iconix, and Gildan with Neutral ratings; and
Deckers with an Underperform rating. Though we expect the environment for
apparel and footwear companies to remain difficult, we think each of these five
relatively controversial stocks possesses a unique catalyst that will lead to
significant outperformance or underperformance. Furthermore, because the
strategic decisions these companies have made with respect to production,
licensing, marketing, and distribution have produced five unique business
models, we believe studying these firms and how they fit into the ever-changing
retail landscape will help to illuminate the potential evolution of the industry and
its microstructure.
Market
Ticker Rating Cap Price TP 2009E 2010E Key Investment Points Positive Negative
GES OP 1 ,862 $19.90 $25 26 % 3 % 7 % Sexy yet stylish - a unique combination ! Europe keeps growing despite macro ! Int'l market volatility accelerates
Underpenetrated globally ! Improving global consumption ! Key Italy business deteriorates
Global licensed store network a competitive edge ! Int'l consumer decouples from U.S. ! U.S. dollar strengthens
Int'l slowdown and fx are key risks ! U.S. dollar weakens ! Inventories take turn for the worse
Pristine B/S and 10% FCF yield limit downside
DECK U 734 $55.62 $45 (19)% (16)% (48)% A very profitable monopoly of sheepskin boots ! Refocus on Ugg int'l growth ! More brand acquisitions
Approaching saturation in the U.S. ! Limit Ugg category expansion ! Accelerate line extentions
Category expansion dilutes profitability and returns ! Increase brand investment ! Abandon distrtibution discipline
Other brand acquisitions could be distracting ! Manage U.S. for margin and cash ! Ignore international opportunity
Big international opportunity for Ugg ! Divest other brands
WRC N 1,162 $24.84 $24 (3)% (15)% (15)% The purest play on Calvin Klein ! Signals of CK merger willingness ! Int'l market volatility accelerates
Intriguing merger potential with PVH ! Divest remaining non-CK brands ! New brand acquisitions
International growth is key ! Int'l consumer decouples from U.S. ! U.S. businesses deteriorate further
Little room for margin expansion ! U.S. dollar weakens ! U.S. dollar strengthens
Int'l slowdown and currency are the key risks
ICON N 5 51 $8.99 $8 (11)% (14)% (30)% Innovative, pure licensing business model ! OP and Starter success at WMT ! Aggressive pursuit of more M&A
Promising Wal-Mart opportunity with OP and Starter ! Credit markets unfreeze ! Cut spending to maintain margin
Underinvesting and overearning a risk ! Increased brand investment ! A key retailer terminates contract
Growth relies on M&A fueled by cheap credit ! Building a more robust infrastructure ! Over-recycled brands die out
One of the most levered companies in the sector to support each brand ! Goodwill write-offs
GIL N 1 ,030 $8.48 $8 (6)% (29)% (44)% Lean basic apparel manufacturing cost leader ! Focus on int'l screenprint mkt ! Expand retail programs
Primary screenprint channel highly cyclical ! Abandon consumer business ! Reaccelerate capex plans
Largest customer is in trouble ! Merge with or acquire a brand ! Start a price war
Retail a strategic misstep in our view ! Halt capacity expansion ! Customer bankruptcies
Overcapacity could significantly pressure earnings ! Screenprint market worsens
Upside
Table of contents
Coverage Universe 4
Industry Drivers and Key Investment Themes 6
This time is different: the end of America’s consumption boom 6
Deconstructing the 2009 consumer 7
Other markets the next frontier 7
Playing this new reality 7
Retail store closures 8
Near-term international slowdown 8
Currency headwinds 8
Where’s the fat? 8
Guess Inc. (GES) 32
International Growth Is Key 40
Geographical Penetration Analysis 41
Vast Network of Local Operators a Competitive Edge Internationally 43
Everyone Wants to Look Good at the Club 44
If You Can Make It In Italy, You Can Make it Anywhere 45
Key Risks 47
Management Overview 50
Valuation Attractive 51
Financial Models 55
Deckers Outdoor Corp (DECK) 57
Saturation the Biggest Risk 64
Uggs a Monopoly in One Category, Another Footwear Brand Everywhere Else 65
When Category Stops Growing, Mix Will Shift to Unprofitable Categories 70
Is Anyone Feeling Aspirational? 72
Other Brand Acquisitions Distracting, Company Should Refocus on International 73
And Don’t Forget the Fad Factor… 76
Management Overview 79
Valuation 80
Financial Models 82
Warnaco Group, Inc. (WRC) 84
Intriguing CK Merger Opportunity 90
The Purest Way to Play CK 94
CK International Growth Alluring 95
FX and Global Slowdown Weigh on Stock Price 96
Limited Margin Upside Due to Licensed Model 97
Retail Partner Bankruptcies Loom 98
Other Brands Not Particularly Relevant 99
Management Overview 100
Valuation 101
Financial Models 103
Iconix Brand Group, Inc. (ICON) 105
Under-investing and Over-earning? 113
Beware of Over-Recycled Brands 113
Worst Case Scenario Not Good, but Unlikely 114
High Leverage, but Liquidity not a Near-Term Concern 115
The Wal-Mart Wildcard 117
Acquisition Track Record Mixed 118
Frozen Credit Markets Mean Organic Growth Matters Most 119
Contract Renegotiation Risk Overblown 121
Management Overview 122
Valuation 123
Financial Models 125
Gildan Activewear Inc. (GIL) 127
Deleveraging the Infrastructure 133
Learning from Fruit’s Mistakes? 134
Retail a Strategic Mistake, Especially Without a Brand 136
Screenprinting One of the Most Discretionary Apparel Categories 139
Screenprinting Market Share at Risk? 140
International Screenprinting More Attractive Than Domestic Retail 141
Management Overview 144
Valuation 145
Financial Models 147
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